| Author/Presenter |
Shinichi Nishiyama (Bank of Canada) |
| Title |
Monetary Policy Lag, Zero Lower Bound, and Inflation Targeting |
| Abstract |
Although the concept of monetary policy lag has a long historical roots in the monetary economics literature, relatively little attention has been paid. In this paper, building upon Svensson's (1997) inflation targeting framework, we explicitly take into account the lagged effect of monetary policy and characterize the optimal monetary policy reaction function both in the absence and presence of the zero lower bound on the nominal interest rate. We numerically show that the function to be more aggressive and more pre-emptive with the lagged effect than the case without it. We also characterize the long-run stabilization cost for the central bank explicitly taking into account the lagged effect of monetary policy. It turns out that, in the presence of the zero lower bound constraint, the long-run stabilization cost to be higher with the lagged effect than the case without it. This result suggests the central bank and/or the government to set relatively high inflation target when they are confronted with relatively long monetary policy lag. This can be interpreted as another justification in targeting a positive inflation rate in the long-run. |
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